2. Cost as a
central
concept
- Costs are values of resources.
- the total expenditure incurred to
produce a product or service
-the property of having material
worth indicated in amount of money
- the total spent for goods or services
including money, time and labor
1. Price fixation
2. Cost Check/Control
3. Wastages
4. Profit margin
5. Measured in
Monetary terms
Cost of services can be calculated by ascertaining the
resources used for rendering the service.
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4. Elements of
Cost
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1. Direct Material
It represents the raw material or goods necessary to produce or
manufacture a product. The cost of direct material varies according to
the level of output. For example, Milk is the direct material of ghee.
2. Indirect Material
It refers to the material which we require to produce a product but is
not directly identifiable. It does not form a part of a finished product.
For example, the use of nails to make a table. The cost of indirect
material does not vary in the direct proportion of product.
3. Direct Labour
It refers to the amount which paid to the workers who are directly
engaged in the production of goods. It varies directly with the level of
output.
4. Indirect Labour
It represents the amount paid to workers who are indirectly engaged in
the production of goods. It does not vary directly with the level of
output.
5. Elements of
Cost
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5. Direct Expenses
It refers to the expenses that are specifically incurred by
the enterprises to produce a product. The production cannot take place
without incurring these expenses. It varies directly with the level of
production.
6. Indirect Expenses
It represents the expenses that are incurred by the organization to
produce a product. These expenses cannot be easily identified accurately.
For example, Power expenses for the production of pens.
7. Overhead
It refers to all indirect materials, indirect labor, or and indirect expenses.
8. Factory Overhead
Factory overhead or Production Overhead or Works Overhead refers to
the expenses which a firm incurs in the production area or within factory
premises.
Indirect material, rent, rates and taxes of factory, canteen expenses etc.
are example of factory overhead.
6. Elements of
Cost
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9. Administration Overhead
Administrative or Office Overhead refers to the expenses which are
incurred in connection with the general administration of the
organizations.
Salary of administrative staff, postage, telegram and telephone,
stationery etc. are examples of administration overhead.
10. Selling Overhead
All expenses that a firm incurs in connection with sales are selling
overheads. Salary of sales department staff, travelers’ commission,
advertisement etc. are example of selling overhead.
11. Distribution Overhead
It represents all expenses incurred in connection with the delivery or
distribution of finished goods and services from the manufacturer to
the consumer. F Delivery van expenses. loading and unloading,
customs duty, the salary of deliverymen are examples of distribution
overhead.
7. Cost
Classification
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Classification of cost according to the element
Direct cost:
It is such a cost that is able to mark directly any particular cost such as raw materials, labor
included operating expenses and some other costs are belongs to the direct cost. These
costs are bind in a unit. For example, we can say a total cost of an advertisement for several
products. The direct cost has some subcategories.
Direct element: Direct element refers to that material which is related all of the finished
product. This material is a part to complete any product. It can have imposed conveniently
on the particular product. The purchased and upcoming requisite products are including in
direct element. As like, all kinds of initial packing material.
Direct labor: Direct labor means the paid salary to the employee who is directly engaged in
manufacturing, handling and processing a product. Actually, they are responsible for the
observation and maintenance of the product also.
Direct expense: Which cost is directly related to any particular expenses is called direct
expense. If a company needs to buy some specific product, equipment or tools are the
examples of direct expense.
8. Cost
Classification
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Classification of cost according to the element
Indirect cost:
Indirect cost means the opposite side of direct cost. Which cost is related to a unit or
department and can’t trace for any specific product is called indirect cost. The indirect cost
has also some subcategories.
Indirect element: Some example of indirect materials is cleaning chemicals, small tools,
glue, and maintenance work. Fuel etc. These element costs are incurred as a unit.
Indirect labor: Indirect labor is covering the supervisors and the inspector’s salary. The
worker of cleaner and storekeeper wages is also including in the indirect labor.
Indirect expenses: Indirect expenses are house rent, hospital service, lighting, insurance,
and welfare trust.
Indirect cost and the overhead cost is often the same. It follows the indirect labor cost
formula.
9. Cost
Classification
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Classification of cost according to the element
Factory overheads:
It is related to all kinds of indirect costs like manufacturing products and time keeper’s
salary.
Selling and distribution overhead:
This overhead is included with advertising expense and packing materials costs such as free
advertising, marketing on the field.
Administration and office overhead:
Administrative expenses is an expense of office works related expenses such as office
lighting, rent welfare trust are including here.
10. Cost
Classification
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Cost classification according to function:
Cost is classified by the following categories. The main four categories
of functional costs are given below-
Prime cost: Prime cost is the adjustment of the direct material, direct
labor, and direct costs. It is actually the result of these three elements.
Product cost: It means the factory cost with administrative and office
overheads
Factory cost: Factory cost is also known as work cost. It is combined with
work cost and work expenses
11. Cost
Classification
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Cost classifications depending on behavior:
By behavior or variability cost is classified as Variable cost, Fixed cost
and Mixed cost which is explained below.
Variable cost: Variable cost is such a cost which proportion is changing
with the amount of production. Such as direct material and changeable
costs
Fixed cost: This cost won’t change with the proportion of production. It
is maximum time fixed. But it is notable that this cost may be changed
after a long time. For example, office rent, insurance, and hospital cost.
Mixed cost: Mixed cost can change overall but not with the proportion of
production. More changeable cost is count under a Mixed cost. The
example of a mixed cost is electricity expenses.
12. Cost
Classification
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Cost classification according to relevance:
Relevance base cost is mainly divided into five categories which are given below;
Relevant cost: Relevant in various decisions. Occasionally there may have many relevant
costs. This cost is not fixed from before.
Opportunity cost: Opportunity cost is the system of getting some extra advantages from the
existing things of a factory like land, money and time etc. Someone can rent his office for
another purpose of advantages. Moreover, they can rent their other things also. It is actually
an extra benefit for a company.
Standard cost: Standard cost is fixed from the previous experience. It was fixed according to
the specific budget, the volume of an industry. The actual cost is also included with this cost.
Controllable cost: Which cost can be controlled by management is called controllable cost.
The manager can control some cost.
Sunk cost: It is known as a historical cost. Sunk cost effect is most important for a company.
It is such a cost which is already lost and can’t be undone anymore. If a company is paid
their monthly rent than we can say this rent cost is sunk cost.
13. Cost
Classification
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Classification of cost according to management:
These costs are mainly divided into two categories; Manufacturing cost
and Non-manufacturing cost given are given below;
Manufacturing cost: Manufacturing cost refers to the total cost of a
product from the raw materials to finish the product. It is mainly the
combination of direct material cost, labor cost, and manufacturing
overheads.
Non-manufacturing cost: In order, the rules of GAAP Non-
manufacturing cost are not actual product cost. It is a part of the
company’s income statement.
14. Costing as a
central
concept
2. Costing can also include the
assignment of fixed costs, which are
those costs that stay the same,
irrespective of the level of activity.
This type of costing is called
absorption costing. Examples of fixed
costs are rent, insurance, and
property taxes.
1. Costing may involve only the
assignment of variable costs,
which are those costs that vary
with some form of activity (such
as sales or the number of
employees). This type of costing
is called direct costing. For
example, the cost of materials
varies with the number of units
produced, and so is a variable
cost.
-It is a system of ascertaining costs.
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15. Purpose of
Costing
2. External reporting.
The various accounting
frameworks require that costs
be allocated to the inventory
recorded in a company's
balance sheet at the end of a
reporting period. This calls for
the use of a cost allocation
system, consistently applied.
1. Internal reporting.
Management uses costing
to learn about the cost of
operations, so that it can
work on refining operations
to improve profitability.
This information can also
be used as the basis for
developing product prices.
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16. Cost
Accounting:
Central
Concept
2. Origin
The environment of a business
in the modern world is very
complex and dynamic. A
business has to navigate many
complex factors such as
competition, new entrants,
risks, uncertainty etc.
1. Branch of Accounting
2. It is a process via which we
determine the costs of
goods and services
3. It involves the recording,
classification, allocation of
various expenditures, and
creating financial
statements.
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17. Cost
Accounting:
Definition
2. the process of accounting
from point at which expenditure
is incurred or committed to the
establishment of its ultimate
relationship with cost centers
and cost units
1. the provision of such
analysis and classification
of expenditure as will
enable total cost of any
particular unit of
production to be
ascertained with reasonable
degree of accuracy and at
the same time to disclose
exactly how cost is
constituted.
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18. Objectives &
Need of Cost
Accounting
1] Classification of
Costs
2] Cost Control
3] Price Determination
4] Fixing of Standards
1. Limitation of previous
accounting system
2. Ascertainment of cost
3. Helpful to those concern
where production is in
large number
4. A decision making tool
5. Advantageous to various
sector
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19. Importance of
Cost
Accounting to
Others
19
Workers: One of the biggest uses of cost accounting is that it helps
us calculate efficiency. This will help the company come up with an
incentive scheme for workers who show efficiency in their work,
and thus they will be awarded accordingly. It is also an incentive for
workers with lower efficiency to do better.
Government: Costing helps the government when assessing for
income tax or any other such government liabilities. It also helps
set industry standards and helps with price fixing, tariff plans, cost
control etc.
Customers: The main aims of costing are cost control and
improvement in efficiency. Both of these are very beneficial to the
company. And ultimately this benefit passes on to the customers of
the products or services.
20. Advantages of
Cost
Accounting
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1] Measuring and Improving Efficiency
2] Identification of Unprofitable Activities
3] Fixing Prices
4] Price Reduction
5] Control over Stock
6] Evaluates the Reasons for Losses
7] Aids Future Planning